Over the past several years, we have
noticed an interesting occurrence in our portfolios. The
American Depository Receipts, (ADRs) of foreign companies have begun
popping up frequently in our portfolios. ADRs were specifically created to
enable U.S. investors to easily buy and sell foreign stocks. There are several
reasons why I like ADRs. Recent studies show foreign companies that list on U.S.
exchanges are more highly valued than comparable foreign companies that don't
list. Also, ADRs allow us an easy way to invest our portfolio into foreign
securities, therefore tapping into these growing capital markets without the
complications of currency exchange and other rules. As ADRs began appearing way
too often on our buy list and too disproportionately to be mere chance, we
determined that international stocks were worth investigating further. We also
found that our quantitative tools worked especially well on non-U.S. stocks. In
fact, our analysis worked all around the globe in both stabilized nations and
fast-growing emerging markets.

As we began to delve deeper into non-U.S. issues, we found a lot of things to
like about the idea of investing globally. Although the United States is one of
the most innovative nations around the world, it's not the only one. New
products, new ideas, and new technologies are being discovered and developed all
around the world. In addition, as free trade booms, the world becomes a smaller
place. A whole new world of consumer markets has opened, increasing demand for
cell phones and computers, automobiles, homes, and all kinds of consumer goods
and services. Banks, retailers, cement companies, and even life insurance
companies have sprung up all around the planet and their burgeoning new markets
of hungry consumers allow them to grow much faster than their U.S. counterparts.
We also discovered, to my surprise, that 10 of the world's largest companies are
located outside the United States. They may do a significant portion of their
business in the United States, but home is on another shore. According to
Forbes magazine, the largest
construction, auto, business equipment, and food companies are all non-U.S.
companies.

To our delight, we also found that one of the biggest hurdles to global
investing for folks like us who rely on extensive examination of
quantitative and
fundamental data has fallen by the
wayside over the last decade. Until recently, information on day-to-day non-U
.S. stock prices was difficult to obtain, to say nothing of the near
impossibility of accessing accurate corporate financial information. The
Internet really has opened the world to almost anyone with an Internet
connection, and now we can get accurate information from Hong Kong, Japan,
Russia, Brazil, or any of the world's exchanges and markets with just a few
clicks of a mouse. Once we had the data we could crunch it, and crunch it we
did. As ranked by our quantitative grades, the top 10 percent of our global
stock picks absolutely creamed the performance of the S&P 500. The top 5 percent
doubled that return again. Clearly we were onto something that worked.

There are strong underlying reasons for the success of
global growth investing. First, there
is a sort of value bias among most global investors, leaving growth stocks less
examined and researched. As a result, when the investment community finally
discovers one of these gems, it tends to rocket in price. Usually our methods
have already gotten us into the stock before this happens and we get to go along
for the ride. We search for global stocks using the same eight tried-and-true
fundamental variables and quantitative measurements that we use on U.S. stocks
and it works amazingly well, uncovering even better buying opportunities.

Part of the reason for the strong performance of non-U.S. stocks is that money
has been pouring into international investments. It is not that money is
necessarily flowing away from the United States; it is just flowing to other
places much faster. International funds have been collecting far more dollars
than U.S. funds, and the strong money flow has created buying pressure in good
stocks, which gives us alpha, exactly
what we are looking for. According to the Investment Company Institute (ICI),
there is now almost as much money in international stock funds as there is in
U.S.-only funds. In fact, non-U.S. funds have outsold domestic U.S. investment
mutual funds by almost 4 to 1 between 2003 and 2006. The strong flows into
non-U.S. markets and stocks is a relatively new phenomenon that shows little
sign of abating, especially given that many non-U.S. stocks are riding a free
currency tailwind from a weak U.S. dollar.

Exchange-traded funds (ETFs) are another important new development in the fund
world. Traded on exchanges and offering substantial liquidity and cost
advantages over traditional funds, ETFs are a fast growing source of investment
cash. The international segment also dominates this area with much more cash
flowing into international ETFs than U.S. indexes.

There are several reasons for this cash flow change. One of the more obvious is
that investors like to diversify their holdings. Most financial advisers today
suggest that their clients have some exposure to non-U .5. assets. In a smaller,
more accessible world it makes sense for investors to go wherever opportunity
presents itself.

Another significant reason for the money flow into non-U.S. markets and stocks
is the Sarbanes-Oxley Act. Sarbanes-Oxley has led to a reduction of the number
of international companies that want to list in the United States in the form of
an ADR share (the media have reported extensively on the issue). With fewer ADR
shares available and more money pouring into international stocks than ever
before, the remaining ADR shares have soared in recent years. Ironically,
Sarbanes-Oxley has effectively helped to reduce the number of ADR shares and
artificially boosted the remaining ADR stocks. Sarbanes-Oxley tightened the
reporting standards for companies listed in the United States and compels chief
executives to sign and personally vouch for their accounting reports and
releases. Many non-U.S. companies have not been interested in being this exposed
to the U.S. legal system. They are well aware that the United States is the
world's most litigious society and they simply have no interest in being exposed
to it. As a result, many have left U.S. markets and many that might have listed
their shares in the United States no longer bother. Both Hong Kong and Shanghai
did more IPOs than the U.S. markets did in 2006, even though the NYSE led the
world in new IPOs just five years ago, before Sarbanes-Oxley was passed. As the
pool of international ADRs has shrunk in the United States, the money has
followed the new names to exchanges in London, Hong Kong, and Shanghai.

Because of the recent compelling reasons to invest globally, we have made a
strong push in that direction. Rather than attempt to set up accounts at
exchanges and brokerages all over the world, however, I tend to favor ADRs since
they are a convenient way for U.S. investors to invest in international
companies -- an otherwise complicated process. It is especially good to know
that ADRs are traded in accordance with U.S. market regulations, so any dividend
payments as well as any corporate action notification will be timely. ADRs are
also convenient because they're quoted and traded in U.S. dollars on the U.S.
securities markets: NYSE, AMEX, and even NASDAQ. Each ADR is backed up by a
specific number or fraction of shares in the foreign company. The relationship
between the number of ADRs and the number of foreign shares is often referred to
as the ADR ratio. I find that using
this way of investing allows me to avoid worries over the different regulations
and currency fluctuations of the various markets around the globe.

There are close to 300 ADRs in our universe and I find that around 25 to 30 of
them at any given time are strong growth opportunities. We diversify, of course,
with a tendency to lean toward the larger countries and companies. We like the
fact that many of these stocks are very conservative and often have large
government ownership, which helps increase the feel-good and sleep-well factor
of global investing. We also sprinkle money across some of the emerging markets
as they can be like rocket ships when they perform well. We keep that portion
small so that we can benefit nicely when they blast off but not get hurt when
they fall back to earth. They are volatile, and we try to make that volatility
work for us and not against us. We also make it a point to avoid countries that
we see as anti-capitalist in their foreign and financial policies. Venezuela
under Hugo Chavez comes to mind as a prime example of a place we will not invest
because of this reason.

Why do we invest globally? Because it increases the number of opportunities
available to us and because it works. The value bias of most international
investors and the continuing enormous flows of cash toward non-U.S. markets
combine to offer an incredible opportunity to growth investors. The information
needed to analyze and invest in these markets is as available as is information
on our favorite U.S. stocks. It's a whole new world out there and we think we
should be a part of it and take advantage of all the growth opportunities ahead
around the world. Billions of people will need new homes, roads, and
infrastructures over the next 50 years. Billions of new consumers will want all
the fancy goods and toys that western consumers have long taken for granted.
There are huge new marketplaces out there, and as growth investors we can
benefit as they develop.